If you are a contractor you can choose to work through an umbrella company or set up and run your own limited company. Like the majority of freelancers, you may be unfamiliar with the responsibilities associated with setting up and running a limited company. The use of an umbrella company takes away the responsibility and workload of setting up and running your own company, providing you with a simple employment solution.
Once you agree to a contract with an umbrella company, you effectively become a Pay As You Earn (PAYE) employee. The umbrella company then contracts with their customers and takes responsibility for paying your own earnings, less your income tax and National Insurance deductions. They will also handle all of the paperwork associated with your work. In the majority of instances, you will not have to fill out a yearly HM Revenue and Customs self-assessment tax form when working through an umbrella company. You will not incur any additional costs relating to insurance and accountancy, as the umbrella company’s fees are usually fully inclusive.
Umbrella companies are often the preferred choice for contractors who prefer not to become involved with any paperwork beyond the production of weekly or monthly timesheets. This is mainly because umbrella companies deal with all of the administrative paperwork relating to your employment. Umbrella companies will aid you in saving on the cost of paying for the services of a professional accountant or tax advisor to help you to prepare your accounts and tax forms. You will not have to worry about invoicing or submitting accurate tax returns and payments in a timely manner.
The use of an umbrella company also allows you to maximise your earnings by helping you to claim a range of expenses, and hence, reduce the amount you pay in income tax each year. The company can claim on your behalf any expenses relating to your freelance work, saving you the trouble of filling out expenses claim forms, leaving you with the time to get on with your paid work. An umbrella company takes the guesswork out of calculating precisely what you are able to claim for and whether or not you have kept the evidence of your purchases to back up your claims. Common allowable expenses for contractors may include mileage and general travel expenses, accommodation expenses, and professional subscriptions. Food and subsistence can usually be claimed for on your behalf in the event that you are forced to stay away from your usual place of residence as part of your work.
As a freelancer using an umbrella company you will not be responsible for conducting your own IR35 reviews, as IR35 legislation does not apply to an umbrella company. The IR35 legislation is a measure of employment status and ability to utilize small company tax reliefs. It was introduced by the Government to prevent tax avoidance. If you happen to fall within IR35, it will be economical for you to carry out your work through an umbrella company.